A Season in Financial Hell

Pharm Exec's Finance Roundtable 2009, a hot ticket scheduled for March 3, was scuttled by a surprise snowstorm too treacherous for travel. Though we were disappointed to miss out on what is always a spirited debate, a weather-borne paralysis seemed all too appropriate at a time when the financial markets have collapsed like a house of cards (or credit default swaps). Alas, we had to make do with phone interviews of our 13 would-be guests, a diverse mix of professionals representing every link in the M&A supply chain—biotech heads and pharma business developers, experts in the strategy and execution of transactions, Wall Street analysts, and private equity firm investors—plus one Harvard Business School professor for critical mass. We asked this brain trust not only to identify trends in the increasingly complex science and art of drug industry dealmaking, but also to share their own strategies—and, of course, make predictions.

Which biotechs will survive the credit crisis? Can Pfizer get megamerging right this time around? Which businesses will which pharma gain or shed? What's the latest in risk sharing and alternative funding? These were just a few of the questions we asked our experts. And then, just as we were concluding the interviews, lightning struck twice more: the Merck-Schering and Roche-Genentech deals were announced, possibly changing the game entirely—and forcing us to bother our experts again.

As you might expect, there's no consensus on whether bigger is better. The one thing everyone agrees on is that between the financial crisis and healthcare reform, pharma is going to be acting—and transacting—as fast as it can.—Walter Armstrong, Senior Editor

It's no secret that pharmas have a number of challenges—patent expirations, getting drugs approved, drier pipelines, and payer pushback over prices. There is also a general feeling that they need to diversify. Consolidation gives the Pfizers and Mercks the ability to quickly address some of these challenges.

There is definitely a strong rationale for each of the three mergers. Wyeth provides Pfizer critical mass, especially in the area of vaccines, and allows it to shift its focus away from blockbuster primary-care products. Genentech gives Roche full access to its oncology portfolio and the ability to improve coordination on product development. Merck gets Schering's anti-clotting drug and its women's health and respiratory treatments clinical program, but also helps diversify its revenue with the 70 percent of Schering's revenue that comes from outside the US.

The three deal structures are different from the debt deals we've seen in the past. They all had a decent-sized equity component—Merck put up 44 percent in cash. This is a trend we expect to continue.

I think these three megamergers are just the tip of the iceberg. There are still a number of other pharma companies with a fair amount of cash on their balance sheets, and M&A is a logical path to pursue, as it's often cheaper to buy than build. You also don't want to be left out of the game—more companies will join forces to ensure they stay competitive.

Pricing pressures and healthcare reform will impact where pharma companies invest their money. Blockbuster drugs and primary-care products are likely to be under the most pricing pressure, forcing companies to diversify. This has already started to happen, as pharmas have started to move from big categories such as cardiovascular and lifestyle products into cancer, Alzheimer's, and obesity, where the needs are not well met. Even more important, real product differentiation in terms of meaningful safety and efficacy advantages will be the best defense against pricing pressure. "Me too" products will be the most vulnerable, even if they have strong patents.